White House, Regulator Considering Refinance Program Revamp

By

Nick Timiraos

Updated Sept. 8, 2011 10:14 p.m. ET

The White House is pushing to revamp an existing federal program to allow more Americans with government-backed loans to refinance, and a federal regulator is weighing changes to accommodate that effort, according to people familiar with the matter.

President Barack Obama alluded to the proposed changes in a primetime address on Thursday night, when he said his economic team would work with federal housing agencies "to help responsible homeowners…refinance their mortgages at interest rates that are now near 4%."

Officials aren't considering a new program but instead are weighing changes to an existing one that the White House rolled out more than two years ago for loans that are already guaranteed by mortgage giants Fannie Mae and Freddie Mac. Potential refinements are also being evaluated by the Federal Housing Finance Agency, which is tasked with conserving the firms' assets and which would have to sign off on any changes.

Falling mortgage rates have added urgency to the refinancing push. Rates on 30-year fixed-rate mortgages fell to 4.12% for the week ending Thursday, according to a survey by Freddie Mac. That is the lowest rate in more than 50 years.

A borrower with a $200,000 loan that is currently paying a 6% interest rate could save more than $200 per month by refinancing at current rates. Many borrowers haven't been able to refinance because they can't qualify under loan standards that are much tighter than when they first took out their loans, or because they don't have enough equity.

The existing White House initiative, called the Home Affordable Refinance Program, or HARP, allows borrowers with loans worth 80% to 125% of the value of their houses to refinance without putting down more cash or taking out mortgage insurance -- costly steps that often outweigh any savings from refinancing.

The program was initially viewed as a straightforward way to help more borrowers who are current on their mortgages to take advantage of low interest rates.

But it has been snarled by a series of unforeseen technical hurdles. Just 838,000 borrowers have refinanced, short of the hoped-for 4 to 5 million. And only a fraction of those borrowers—less than 63,000—are significantly underwater and among the most at risk of default.

Officials are in discussions with mortgage-industry executives and officials at Fannie, Freddie and the FHFA over how to improve the program. That collaboration offers a "hopeful sign that we can finally get this program that we all agree targets a very important sector of borrowers—but that's just not adequately worked to date—to work better," said a senior Obama administration official.

Any fixes would need to address banks' concerns over the risk that they will have to buy back refinanced loans that ultimately default. Banks have been reluctant to refinance riskier borrowers because they would have to take on the "buy-back" risk if borrowers ultimately default.

The changes could also limit certain risk-based fees that Fannie and Freddie charge lenders and other costs that have made it unattractive for borrowers to refinance.

Officials are also considering whether to raise the 125% loan-to-value cap for the program, allowing borrowers who are more deeply underwater to refinance. The cap was initially set at 105% of a home's value and was increased to 125% shortly after the program was announced. Raising it even higher could be challenging because those loans wouldn't be eligible for sale into standard pools of mortgage-backed securities.

An FHFA spokeswoman declined to comment.

The scope of the changes could ultimately determine how many more borrowers are able to refinance. So far, government housing programs have fallen short of ambitious targets set by policymakers. "That's been the story of all these government initiatives so far," said Guy Cecala, publisher of Inside Mortgage Finance. "We don't have any home runs, and there's no reason to believe this would be too."

Economists estimate that proposed changes could spur at least $20 billion in interest savings for borrowers, who could might spend some of that savings and who would be less likely to default.

Bondholders, including the mortgage giants, banks, and pension funds, could lose money as loans pay off early, leaving investors with cash to reinvest at lower rates. Critics have argued that those losses would mute the economic gains of refinancing. They have also warned that intervention could create uncertainty that would raise rates for future homeowners.

At a speech in Washington last week, Federal Reserve Governor Elizabeth Duke dismissed those concerns by pointing to her previous career in banking. "When I bought mortgage securities…I always knew they were subject to refinancing," she said. Changes that allow borrowers to exercise their traditional right to refinance shouldn't be "harmful to the markets," she said.

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